Joy Global: A Peter Lynch Pick

10/03/2013 8:00 am EST


John Reese

Founder and CEO, And Validea Capital Management

We select stocks based on the strategies of legendary investors; our latest pick scores highly on the price-to-earnings-to-growth strategy developed by Peter Lynch, writes John Reese, editor of Validea.

Joy Global (JOY) is a manufacturer and servicer of high productivity mining equipment for the extraction of coal and other minerals and ores.

Its equipment is used in mining regions throughout the world to mine coal, copper, iron ore, oil sands, and other minerals.

According to our Peter Lynch model, this methodology would consider JOY a fast-grower.

In addition, the investor should examine the P/E (7.97) relative to the growth rate (20.35%), based on the average of the three, four, and five-year historical EPS growth rates for a company.

This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for JOY (0.39) is very favorable.

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remains below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold.

JOY, whose sales are $5,425.8 million, needs to have a P/E below 40 to pass this criterion. JOY's P/E of (7.97) is considered acceptable.

This methodology would consider the Debt/Equity ratio for JOY (44.27%) to be normal (equity is approximately twice debt).

When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive.

Inventory to sales for JOY was 30.29% last year, while for this year, it is 25.00%. Since inventory to sales has decreased from last year by -5.29%, JOY passes this test.

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that, in many cases, can continue many more years.

This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable.

The EPS growth rate for JOY is 20.3%, based on the average of the three, four and five-year historical EPS growth rates, which is considered very good.

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